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AEMD: DAPRA Revenue, Operational Progress Continues

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By Brian Marckx, CFA

10-Q Filed for Fiscal Q3 2013 (12/31/2012)

Aethlon Medical (OTC BB:) filed their 10-Q for their fiscal Q3 2013 ending 12/31/2012.  Results remain very much within our expectations with moderate revenue booked from the DARPA contract and operating expenses and share count just about dead-on where we modeled them.  The booked revenue in the quarter relates to the first (milestone - described below) of eight milestones encompassing the second year of the DARPA contract which AEMD was awarded in the Summer of 2012.  Subsequent to the end of fiscal Q3 (12/31/2012) AEMD invoiced for the second milestone under this year-2 contract in the amount of $196k.   

Milestone – Build the ADAPT capture cartridges with the identified affinity agents. Measure the rate of capture of the specific targets from in ex vivo recirculation experiments from cell culture and blood. The milestone payment was $208,781. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated that we were able build the ADAPT capture cartridges with the identified affinity agents and to measure the rate of capture of the specific targets from in ex vivo recirculation experiments from cell culture and blood. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.

As we noted previously, during fiscal Q2 AEMD completed work on the final three milestones (all three of which are meaningful as they relate to the utility of Hemopurifier in removing and measuring targeted toxins from the blood and/or represent progress towards initiation of human studies) related to the initial 12-month DARPA contract.

AEMD continues to make progress on other fronts as well including submitting an IDE to FDA for approval to commence a small U.S. study, initiated compassionate use treatment at Medacity, awareness-building efforts through presentations at key conferences (Biotech Showcase, Int'l Conference on Dialysis,, MD Anderson Cancer Center), raising additional capital, and cleaning up the balance sheet (including retiring o/s debt through conversion/swaps to equity). 

Q3 revenue of $209k (vs. $358 E) represents the first milestone under the second year of the DARPA contract which is worth up to $1.6MM.  Through 12/31/2012 and to-date (including the most recent invoice) AEMD invoiced for $2.18MM and $2.38MM, respectively, under the DARPA contracts.  As a reminder, DARPA has the option of entering into the remainder of the proposed contract for years three through five, which would pay Aethlon up to an additional $3.2 million, annual payments under which would range between $775k and $1.6 million.

Q3 operating expenses were $1.1 million, coming in slightly better than where we had modeled them.  Net income and EPS of $314k and $0.00 were ahead of our ($1.11) million and ($0.01) due to the benefit of a $1.38 million (non-cash) revaluation of derivative liability. 


Aethlon exited fiscal Q3 (12/31/2012) with $108k in cash and equivalents, compared to $272k at the end of the prior quarter (9/30/2012).  Cash used in operations was $662k in Q3 ($1.6MM in 9 months ending 12/31/2012), compared to $595k used in Q2 and $1.84 million in fiscal 2012. 

Q3 ending cash balance benefitted from Aethlon raising approximately $498k from the sale of 7.87 million common shares in three separate transactions during the quarter.  AEMD sold another $205k (3.2MM shares @ $0.064) worth of restricted shares subsequent to Q3 quarter end. 

Despite being in default on the majority of their debt obligations (although they have recently successfully converted some debt to common stock), Aethlon continues to be successful in raising piecemeal capital to finance operations.  We think this speaks positively to the ongoing investor interest in the company and faith in the potential for the Hemopurifier.  And while the additional recent financing and revenue from the year-2 DARPA contract should provide some breathing room, as we've noted in the past Aethlon will need to raise a substantial amount of cash, enter into partnering arrangements or score additional valuable contracts/grants (which could include the potentially valuable DARPA systems integrator contract) in order to maintain operations for the longer-term.

IDE Submitted Seeking Approval of U.S. Feasibility Study

In early January 2013 AEMD announced that they submitted an Investigational Device Exemption (IDE) to the FDA seeking approval to commence a 10-patient safety and effectiveness feasibility study of Hemopurifier.  We view this as a meaningful step towards AEMD's goal of bringing Hemopurifier to the U.S. market.  The company notes that data from the recent and ongoing studies at hospitals in India were used to support the IDE submission and also included HCV capture data, the latter which that the FDA had requested at a pre-IDE meeting in 2011.

The proposed trial, which we expect would begin shortly following an approval by FDA of the IDE, would enroll 10 end stage renal disease patients infected with HCV and be conducted by the Renal Research Institute, a partnership between Fresenius Medical Care (FMS), a leader in dialysis products and services, and Beth Israel Medical Center in NYC.

AEMD recently noted that since their IDE submission they received comments and study design considerations back from the FDA and are now preparing a response.  The hope is that this will lead to the initiation of the study. 

Compassionate Use Program at Medicity to Commence

Aethlon announced in early December that they initiated a compassionate use program at the Medicity Institute in India using Hemopurifier therapy in the treatment of HCV.  As a reminder, earlier in 2012 the Medicity IRB approved use of Hemopurifier in a compassionate use program and in early October AEMD announced the protocol that will govern treatment under this program.

The initiation of treatment under compassionate use marks AEMD's initial foray into commercialization of Hemopurifier.  The press release detailed the treatment pricing ($7,235 for 3-day treatment, $2,295 each add'l day) and reiterates the previously announced protocol and inclusion/exclusion criteria.  Subsequent to this announcement, AEMD also noted that the compassionate use program was expanded to include individuals that experience a viral breakthrough during standard of care drug therapy.   

As we've noted in earlier investor notes, the compassionate use program should provide AEMD with another revenue stream (albeit likely minimal, particularly at the outset) and potentially more importantly, will increase the overall patient experience and treatment volume which could bode well for increasing awareness of Hemopurifier therapy and further bolster credibility of the technology.

Treatment under this program is open to patients worldwide and could potentially draw individuals from outside of India, including the U.S. and Europe - AEMD notes Medicity is a leading center for medical tourism.


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